SEBI Reforms – Part 1: Insider Trading

Yesterday, SEBI’s
board unleashed
a series of capital market reforms. These relate to insider trading, delisting,
enforceability of the listing agreement and several other matters. In this
post, I briefly examine the implications of the reforms on regulations
pertaining to insider trading.

The SEBI board has
approved a new set of regulations dealing with insider trading. While the text
of the regulations are awaited, here I discuss some of the broad reforms
announced. The impetus for reforms in this area came from the report of the
SEBI appointed committee that was issued in December 2013 (as previously
discussed here).
In the current reforms, SEBI has broadly adopted the recommendations of the
committee on several aspects, but it has either not adopted others or made
significant changes.

First, the crucial definition of
“insider” has been widened to include “persons connected on the basis of being
in any contractual, fiduciary or employment relationship that allows such
person access to unpublished price sensitive information (UPSI).” It expands the nature of connections a person
may have with the company so as to fall within the scope of an insider. Also,
any person who is in possession of or has access to UPSI would also be an
insider. At the same time, some proposals of the committee in this behalf have
not been accepted, such as the inclusion of a public servant with access to
UPSI as a connected person.

Second, immediate relatives would be
presumed to be connected persons, with the burden shifted on to them to show
that they were not in possession of UPSI. The evidentiary aspects of insider
trading have been given great importance given the difficulties SEBI has faced
in the past to establish that a person was in possession of UPSI. While the use
of circumstantial evidence has worked in some cases, in others it has failed.
This burden shifting effort may end up being somewhat crucial in SEBI’s efforts
to curb insider trading.

Third, as regards communication of UPSI,
certain allowance has been made for “legitimate purposes, performance of duties
or discharge of legal obligations”. These has been a substantial discussion
about the need for communication of UPSI in genuine commercial or investment
transactions, such as due diligence for a private equity investments, which
fell within the scope of the prohibition under the existing regime. The new
regime makes some leeway for such genuine transactions (with some conditions)
that may benefit the company and its investors more generally.

Fourth, where communication of UPSI is
permitted, such as in the case of due diligence discussed above, the UPSI must
be disclosed to the markets at least 2 days prior to the trading in the
securities. This is necessitated so that information symmetry is created in the
market such that no investor has any undue advantage.

Fifth, the scope of UPSI and
“publication” have been clarified. For example, for information to be generally
available (so as to fall outside the scope of UPSI), such information must be
accessible to the public on a non-discriminatory platform which would
ordinarily be the stock exchange platform. In other words, dissemination
through the stock exchange is considered the preferred channel of publication.
Furthermore, the definition of UPSI has been aligned with the information and
disclosure requirements under the listing agreement.

Overall, some of
the changes are indeed significant, given the mixed success of the present
insider trading regime. However, as is usually the case, a lot will lie in the
wording of the regulations and their interpretation.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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